Banks: Don't write them off - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Banks: Don't write them off

Sep 9, 2004

Indian banking stocks have been on a roller coaster ride since FY00 and various factors have contributed to the same. While in FY00, it was a rally in the market as a whole that led to the rise in banking stocks, in FY04, it was a combination of both fundamental as well as market wide factors that increased interest in banks among investors. While the rally in the Indian markets started in April 2003, the fundamental changes occurring in the Indian banking sector started earlier (around FY02). The fundamental change here refers to a falling interest rate regime and robust growth in retail advances. The downward bias in interest rates enabled banks to book large profits on their G–Sec portfolios. Not only did net profits rose faster, higher G-sec profits enabled banks to significantly reduce NPAs (non performing assets) aggressively.

But the stock markets took notice and started buying banking stocks when the overall market was in an upswing. The table below indicates the movement of the adjusted price to book ratio values of four public sector banks in the last five years.

P/Adj book value per share (x)FY00FY01FY02FY03FY04
Bank of India4.21.71.61.51.2
Corporation Bank1.10.91.00.81.2
OBC0.70.60.60.61.3
SBI2.01.71.31.31.7
Price is taken as the average of high and low prices for that particular year

The table indicates that except for Bank of India (BOI), the rest of the banks have seen a drastic improvement in the adjusted price to book value ratio in FY04 as compared to FY03. This indicates that till FY03, investors did not pay much attention to the fundamental changes in the sector. However, once the undertone of the market as a whole was bullish, investors started flocking back to banking stocks. The table below shows the trend of the adjusted price to book value ratio for four private sector bank stocks from FY00 till FY04.

P/Adj book value per share (x)FY00FY01FY02FY03FY04
UTI Bank4.84.81.51.12.4
IDBI Bank1.62.01.31.21.6
HDFC Bank5.46.23.22.83.3
ICICI Bank2.63.52.01.92.1
Price is taken as the average of high and low prices for that particular year

The case for private sector banks is also not very different from that of the public sector. What we are trying to indicate here is that while banking sector stocks have witnessed an improvement in their valuations in the last one year, it seems that it has been more so a response to a bullish market than due to investors actually finding value in them. This, to an extent, can be justified by the fact that banking sector stocks were the worst affected by the fall in the markets.

The trigger in the last three years…

  • Interest rates were softening. Cost of money became cheaper.

  • While corporate credit was lackluster, retail advances grew at a stellar rate (housing loans being the key contributor).

  • Higher retail credit (a supposedly better margin and less risky asset class) and higher profits from G-secs improved the balance sheet of banks.

What is likely to change in the future...

  • Interest rates have bottomed out. Cost of money is only going to increase (albeit at a gradual rate). Still there exist a probability that the cost of money will be lower than historical rates (i.e. 1990s).

  • Economy is growing faster and corporate credit demand is likely to pick up.

  • Though retail credit may slowdown, the long-term prospects continue to remain favorable.

  • Higher corporate lending could result in NPAs increasing over a period of time and in this context, the sustenance of current efficiency levels in the balance sheet is questionable.

  • More importantly, the 'valuation' of banking sector could settle down to more realistic global averages (1 times to 1.5 times price to adjusted book value).

The Indian economy is at the cusp of an investment cycle and banks will play a pivotal role in realising the objective of an 8% GDP growth. It is time to be realistic about expectations and it is by no means, 'curtains for banking sector stocks'. However, the underlying message is to remain selective.

Equitymaster requests your view! Post a comment on "Banks: Don't write them off". Click here!

  

More Views on News

7 Stocks that Mutual Funds Can't get Enough of (Views On News)

Dec 1, 2021

Come hell or high water, these are the top Indian stocks which mutual funds never leave.

5 Indian Banks with the Lowest NPAs. Here's How they Did It... (Views On News)

Sep 27, 2021

These banks have managed to maintain their asset quality even in the middle of a pandemic.

PNB Reports an Over Three-Fold Jump in Net Profit as Provisions Fall (Views On News)

Aug 3, 2021

The reduction in provisions for bad loans and asset quality stability may have aided the lender's earnings.

Here's Why IndusInd Bank's Net Profit Doubled in the June Quarter (Views On News)

Jul 28, 2021

All you need to know about the latest quarterly results of IndusInd Bank.

Axis Bank's Stock Falls as Results Disappoint on Asset Quality (Views On News)

Jul 27, 2021

Axis Bank's net profit more than doubles on a spike in other income and lower provisioning.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

6 Penny Stocks that Rallied 1,000%+ in One Year (Views On News)

Dec 6, 2021

These penny stocks shed their penny status by surging 1,000% or more in the last one year.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Dec 9, 2021 (Close)

S&P BSE BANKEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS